Good day, and welcome to the NN Incorporated Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Robbie Atkinson. Please go ahead.

Thank you, operator. Good morning, everyone and thanks for joining us. I’m Robbie Atkinson, Vice President, Corporate Treasurer and Investor Relations and on behalf of our team, I would like to welcome you to NN’s third quarter 2016 earnings conference call. Our presenters this morning are President and Chief Executive Officer, Richard Holder, and Vice President and Principal Financial Officer, Tom Burwell. If anyone needs a copy of the press release or the supplemental presentation, please call our Abernathy Macgregor at 212-371-5999 and they will be happy to send you a copy. Before we begin, I would ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and the risk factor section of the company's 10-K for the year ended December 31, 2015. This same language applies to the comments made on today's conference call, including the Q&A session, as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, future operating results, performance of our worldwide markets and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the company's control. The presentation also includes certain non-GAAP financial measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and supplemental presentation. First, we will give an update and overview of the quarter and then afterward, we will open up the line for questions. With that said, Rich, I'll turn the call over to you.

Thanks, Robbie and good morning and welcome to our Q3 earnings call. As usual, we'll walk through the deck and then we'll open up the lines for questions at the end. We if jump straight to the Page 2, I want to take a minute before we dive into the results. I want to take a moment and review the year. At the beginning of the year, we told you that we would focused full tactically and strategically on optimizing our business operations and solidifying our operational foundation in the course of the NN operating plan, NN Operating System. While we can’t always control the top line, we think the results that was showing over the course of the year is evidence of the work that has been done and the work that’s on going. So with that, if you look at our improvement over the course of the year, 2015 versus 2016 gross margin as a company is up 330 basis points, 30 basis point on ATC at 110 from PBC and of course the acquisition of PEP contributing the lion share of 630. On our adjusted operating margin improvement, the company is up 260 basis points and you will see the break down by the group is the lowest. And EBITDA were up 220 basis points and you see the contributing below that ATC at 100, PBC at 80 and PEP at 710. All this is being done in the pace, what I think we can all agree are some extremely challenging industrial markets. But I think what it does is, it further proves the thesis that has been, being and continue to run the business better and put the operational improvements in the NN Operating System in. We are expanding margins and doing the things that we…

[Operator Instructions] We will take our first question from Steve Barger with Keybanc Capital Markets.

Hey good morning guys. So I will start with Slide 17, the 2017 revenue guidance is about 3% growth next year midpoint-to-midpoint, obviously revenues has been tough to forecast for you and to be fair for a lot of companies. Is there any more detail that you can give about that forecasting process and run into those assumptions? Just what give you confidence in the segment works?

We build a bottoms up forecast, we spend an awful lot of time with our customers, try to understand their plans, understand their backlogs and we do a bottoms up build purely from the customer. And we do bottoms up build from new programs and what demand we think we see in the marketplace. We generally put some sort of derating on that because we have issues with FDA releases and all the other agency things that go along with that so we generally put some amount of derating around that. We look at the economics of each segment, so we have the HIS report, we have a number of other reports that we look at the sort of bring some sense let’s say around the other numbers. And that’s fundamentally how we build it, we model it up and down and that’s kind of how we do our forecast, because we don’t have access to the direct access to the channel, we don’t go into any sort of dynamic planning, because we don’t have that trigger to pull.

Understood, so I guess when you think about the customer planning schedule that you see, how far out typically is your confidence level, do you see six months as firm and the next six months after that as uncertain, just what is your visibility?

I would tell you that I think we see I will say 75% of the business pretty firm six months out. And may be if go out to a year, we will say that number will probably drop to about 65%. And part of this is because understand there is a chunk of our business that goes to the channel through an OEM. So I will use, let’s use SKF for an example. We are selling to SKF, 50% of what SKF is selling out in the marketplace is going into the channel. So the channel behavior is very difficult to predict. On a dynamic basis especially since there is, kind of one stop in between us, so that accounts for kind for that 75% that is that's flats. Now what we do, do within that 25% is we derate that 25% under the assumption that if that flats up or down some 5% one of the other businesses should be able to float in the other direction sort of that same 5%. Hope that makes a sense.

I get it so with 2017 coming in for through the expectations and probably your expectations if we look back to the beginning of the year; how we should, we think about the 2018 stretch goals, how does that get reset out?

Yes, so I think the way to think about that right now is again it's all about industrial market right so give or take the industrial market is worth I will say somewhere around $65 million to us right as you look you to the end of 2018 it's probably more around $75 million to us. So today, if the market does not come back, we have roughly a top line hold of about $65 million and if you think about from an EPS basis, we get to about 3.50 and then we have a hold.

Okay, and will you provide more details about that bridge presumably you have an Analyst Day in Jan that is early part of next year?

Yes, absolutely. Now let me say this. I don’t know if it's reasonable to assume that the market is going to stay down essentially what is another two years given how long this kind of projected downturn has been but I think we can all agree the market is continuously surprised us with its behavior so.

No, I would agree with that. Okay, last question for me and I will jump back in queue. Your original EBITDA guide for this year was 169 now we are at 151 mid-points so down $18 million. Three cash flow guidance to essentially the same as $50 million. So can you go through what the big positive offset were to the lower earning component of the EBITDA and really, the question is about trying to get confidence in the 2017 free cash flow outlook?

This is Tom. So essentially working capital is one of the bridge item for the lower sales volumes and also we have continued to maintain the cash earnings.

So we are in working cap as the gap?

Yes, working capital is a big move; working capital is a $10 million move for us.

And how are you modeling working capital for next year as a contributor or detractor?

Slight improvement next year, not as much as this year but a slight improvement from next.

So, I do want to say do you think about we maintain the earnings through most of the quarters.

Right. Okay, thanks.

And will take our next question from Justin Long with Stephens. Please go ahead.

Thanks and good morning. Maybe just follow-up on one of those earlier questions. What is the 2016 guidance now assume for the full-year revenue headwind from the industrial end-market. I think Rich you said next year the guidance was around at $70 million decline. So I just wanted to clarify what the headwinds from industrial this year and next year?

So this year roughly 50 million bucks. If the market doesn’t comeback at all, roughly let’s call it $60 mil to $65 mil for next year.

Okay. That helps. And then thinking about if and when in this market does comeback. How should we think about the incremental margins on that revenue once it returns? So I know for the business as a whole, you have talk about this 35% incremental margin number. But I think in your prepared remarks you said, this tends to be a pretty high margin business. So I’m wondering if the incremental and industrial might be above that 35% average.

Well, the short answer is absolutely. The way you think about the industrial pieces about a 45% blended in from out. And absolutely right the first $20 million or so will be much higher than 45 million and then as the factor we have soon out it comes back to 45 million as an average.

That’s helpful. I would assume the detrimental or probably higher than that 25% average you talk about. So basically, it hurts you more on the down side, but can help you more on the upside when as return?

It does. I will tell you, if would be look at the results we have been flexing it down at the 25 level, it has taken a lot of elbow grease to make that happen, but that is part of our plan. But suddenly the mix component relative to margin inside the industrial mix the job of more difficult in the detrimental side in the house for sure.

Okay. That’s helpful. And looking at the 2017 guidance, you talk about the assumption for the auto and market to be flat. But Rich, could you talk about the sensitivity in the business to one million-unit change in the North American in either direction?

Yes. I mean if we drops from, let’s call it [17.2 down to 16. 2] (Ph) in North America next year assuming and keep in mind, there is some 30% business in Europe. Assuming Europe stays at the numbers that they are, we are probably not very far off our plan, we are able to maintain plus or minus the couple of hundred thousand units. I think margin is certainly okay through that. If we get around 16 much below 16 and Europe starts to fall at the same pace of North America then that’s the point where we have a little bit of challenge. One of the thing that when we talk about this contra cyclicality even within this pace. Generally, Europe is about two years offset from North America. So Europe is still for instance it will probably come in growing to see about 7%. The expectation is growth next year even though North America is flat. And then it will start to looks like North America this year and flattening out a bit. So we have that offset in Europe. So a million drop in the North American market with Europe behaving appropriately is we get to ride through that. Keep in mind also, you got the wild card in there of Brazil and you are starting to see a pulp in Brazil it’s not yet anyway near what it was, but you will see some stability, it’s no longer falling. So we feel pretty good that we have seen the bottom there and so starting to see a little bit of an up lift. So put that global business all together, we should be able to ride through a 700,000 may be a million drop in North America; we should be able to rest a while our way through that. Never want to be too talky, but we should be able to rest a while our way through that.

That’s helpful, and maybe I will just leave to you one more, I had a couple of modeling question is guess for Robie or Tom. Could you talk about what you are expecting in terms of the leverage ratio at the end of this year and the end of 2017? And then secondly, how should we be thinking about the adjusted tax rate going forward and what is kind of in your guidance for 4Q and next year?

Sure, I will the leverage question; I will let Tom speak to the tax rate. This year at the end of the year, we would non-adjusted EBITDA to be just under less than five times levered at the end of the year. And then by the end of 2017 we would expect to be under 4.5 and still see a good clear path to less than 3.5 times by the end of [indiscernible].

And on the tax rate if you adjust for the non-GAAP items in the amortization of the differed financing thoughts and advantages, you are looking at 25% to 30% [Indiscernible] again the more money we earn in the U.S. to higher dollar rate.

Okay that assumption change in the guidance you issued yesterday and today or is that tax rate essentially unchanged from what you were expecting before?

It’s essentially unchanged, we guided an adjusted rate of 20 to 25 and that’s right where we are in Q3 and Q4 [Indiscernible].

Okay, got it. Thanks guys, I appreciate the time.

We will take our next question from Larry Pfeffer with Avondale Partners.

Good morning guys. So Rich on PEP into 2017, obviously we should expect that to be the fast growing segment, could you speak to kind of the Opex and CapEx, you are adding into that piece next year and what you would expect, may be a look at segment margins to be there?

Yes. So we are still working always or exactly the CapEx piece, we have got quite a bit of investments that we will be making in that business because we reported something now that we will need more equipment to handle. We think the growth rate; if you blend it between electrical and medical, let’s call it between 5% to 7% growth rate blended between those two businesses. And if you I think about increase in CapEx year-over-year within those businesses somewhere around $6 million or above give or take to handle these things. Now I want to put a bit of some guardrails around that, there are some programs that we are looking at right now that should we win those programs that $6 million number will bump up considerably. We just won't send the CapEx until we win the program, so we are awfully close to [Multiple Speakers]

Okay, and would those be on the medical side of the house?

Those would more than likely be on the aerospace side.

Okay, just kind of speaking in PEP looking at sort how revenue paces here. I mean are there just some things going on with the FDA approvals an customers integrating acquisitions that are delaying a little bit of the revenue ramp for you guys in that business?

We have one substantive program - we have a number of programs, but we have one that is a very significant program that today it's being delayed and has been delayed for the last candidly two quarters by the FDA. Part of the delay has to do with the emergence at the top level that's going on and sort of who is doing what and who is responsible for signing off what documents. And so we just have to kind of sit back and wait till that happens. But let me say this, in general a new program delays for us is an organization. Medical and a couple of the other segments candidly is probably sort of $250 million this year.

Understood. And is that line of sight to most of that. Is it just hanging or are there some things they could fall through or you just waiting for that to come in 2017 or whenever it is?

Certainly, on our biggest medical program we felt pretty confident that it would break loose at least five year and this year and we have not seen that. We have had the FDA come visit a couple of times; we have done everything we can do in the process. I think it's reasonable to say it will break loose in 2017, but it's the government, we don’t see any bottom. It’s kind of interesting, on the electrical side of the house, we have the ability to go to UL and shake that tree in UL. We don’t have that ability at [Indiscernible]. I know that’s probably not a great answer, but unfortunately, we are placed to that buck.

So I can appreciate that. And then just last thing for me looking at just your electrical end-market outlook. We have seen some choppier non-res data points I just kind how are you seeing the market now and then sort of how would you see your business fitting into that next year?

Yes, I think we are feeling pretty good about that business and that business is getting more and more exciting, because we have key things happening in that business right. You have fortunately a bid of an unexpected surge taking place right and you have got now, if I'm getting too technical I apologize. But we have weather on our side now, all right we have got extensively what is the a protracted fall, so the building season is being extended and that's only the good thing on the residential side of the house. Right. So we feel good about that part of that in terms of market itself for next year. Also a good chunk of what our growth is coming from is, we are taking share. So we have got those programs locked up, we are going through the various testing and so on. So we feel pretty good about our growth rate and our performance in that business 2017 to sure.

I appreciate the color. Best of luck guys.

Thanks.

And our next question from Daniel Moore with CJS Securities. Please go ahead.

Thank you. Want to drill down Rich extent that you have visibility a little deeper into industrial. You mentioned $60 million to $65 million kind of a whole in 2017. How much of that would you tie directly or indirectly to oil and gas markets? Any other specific markets that you are seeing that you comment on. I’m trying to get a sense of how much of that, you are confident in, will have to comeback at some point and how much might be structurally impaired?

Yes. I think we could talk about that’s a long time. We have probably if we look at 2017 you think about that $65-ish million number. I would say you probably half of that number maybe a little bit more than half of that number is tied what we call the [rock bit] (Ph) market. Off highway stuff, drilling equipment, things of that nature, that are not necessarily oil and gas, but can be secondarily impact-ish by the behavior of oil and gas. So they don’t sell directly into that market, but if that market is not performing well, it has a kind a tendency to affect especially by volumetrically, what happens in the rock bit market and then that affects pricing in the outbound marketplace. And that is part of, I mean if you listen to some of our customers, they will tell you that’s part of the problem today, is that the loss of volume in oil and gas is have in the secondary affected infrastructure. And so infrastructure pricing is off and until they rectify pricing misalignment, the market price in not going to break lose. And I think there has been some write-up in a journal in a few other places around that pricing misalignment for the big guys in marketplace that I think proved that theory true.

Helpful. Looking at the 2017 guide, what are your assumptions embedded for pricing?

We have pricing flat.

Got it. And I’m kind of jumping around here a little, I apologize. But looking at the performance in Q3. Roughly, what was organic growth in PEP side of the business to try to get a sense there and adjusted operating margins if you have it pro forma those, how were they performing year-on-year?

Incrementally growth of PEP was somewhere around let’s call it 3.5, four. And I’m sorry what was the other half please?

Just margins on kind of apples-to-apples basis.

Yes. Margins are up 150 basis points. It’s a little lumpy that some place were up, somewhere between 150 to 200 basis points.

Got it. And lastly, I think I heard next year 25% to 30% tax rate is that right? Embedded in the guidance.

Yes. That’s the range.

Got it. Thank you.

In moving on, we will take our next question from Stanley Elliott with Stifel. Please go ahead.

Guys good morning. Thanks for taking the question. Quick question on the Autocam business, sales were down nearly three million, EBIT was down about two million. Is that all industrial and kind what segments within the industrial piece were causing that decline. Is there anything from the cost side that needs to happen or is it more strictly just a mix sort of an issue the quarter?

Yes. So it’s pretty much of mix, it is in fact all industrial, it is believe it or not large isolated to a single customer that incurred I think a map of slow down and with very strong margin on this product. So yes, we know exactly where those sell went or didn’t go.

Yes. I understand. With the slowing industrial economy, is there risk or are you seeing any of the companies that had previously been on this outsourcing trend, start to bring things back and have to settle up there or is that such a long cycle time that it’s really hard to see any sort of a change quarter-to-quarter?

Yes, I think probably the best way to answer that is, it’s all depends on management strategy, right. I personally had a couple of meetings with a few CEOs that they are going to push out as much as they can push out and sort of get rid of as much fixed cost as they possibly can. Conversely, I sat down with some folks who are actually contemplating since they can’t seem to shut their entire factory then they want to optimize the factory. I don’t know if I could say 50/50, but I have certainly spoken to I think probably more people are looking to push it out than bring it in. But I think there are some folks out there that are traditionally vertical and so their tendency is to pay, I will bring it in. And you have some folks out there I would just say largely in the fluid polish space and so one that traditionally are looking to push it out, and those guys are looking to accelerate the push out.

Great and then lastly for me, can you give us an update on what’s happening with the CFO search, haven’t seen a whole lot of news and where it is. Kind of where we are within in that process and what the board’s position was? Thanks.

Yes. I think relative to that search, I think brining that to an end. I will be having a discussions with the board about where are in that search, I think in two week or later this months. Then I think shortly after that we will know where we are.

Perfect and if I could sneak one more in, you are assuming we get the soft call at year-end in six months. How much of an interest savings could you guys pick up on that debt outstanding?

Sure, Stanley I think when you look at the soft call for next year, you have to think about a lot in the summary, I talked about this one. I think they are somewhere between 25 and 75 basis points they have been through [Indiscernible] probably come out, especially with six more of deleveraging. So as the market conditions change, we will take a look at it. But sitting here today that’s the range I would tell you. I think is achievable when the stock call expires.

Great, guys. Thank you very much and best of luck.

Thank you.

And I would now like to turn the call over to management for any additional or closing remarks.

Thank you operator. I think with that will bring the call to a close. Once again, I would like to emphasize that I think the business is running in line with the strategic and the tact per plan. Clearly we are having an end-market struggle with the industrial segment as is our customers and everyone else, but I think taking that into account, certainly we are still expanding our margins as we said we wouldn’t, we are still extracting I think optimal performance out of the business. So we certainly plan to continue to do that and we look forward to talking chatting with you next year. With that, we will close the call.

Once again, that does conclude today’s call. Thank you for your participation. You may now disconnect.